Hunton Retail Law Resource

As the retail industry continues to invest in and leverage new automation technologies to meet organizational efficiency and cost reduction goals, a growing number of retailers are looking to robots, or more specifically, service delivery automation or robotic process automation (“RPA”), as a solution. What is RPA? In the abstract, RPA is the substitution of human workers with automation. In the real world, according to the Institute for Robotic Process Automation, that translates to software robots that capture and interpret data from existing applications to process transactions, manipulate data, trigger responses and communicate with other digital systems. RPA doesn’t mean that robots will soon be sitting in a cubicle in accounting...at least not yet.

The New Automation Frontier

Many retailers that have entered into Information Technology Outsourcing (“ITO”) and Business Process Outsourcing (“BPO”) arrangements are looking to leverage RPA to wring out efficiencies that aren’t available in a simple offshore labor cost arbitrage model. The world’s largest ITO and BPO service providers, such as HP, IBM, TCS and Accenture, are answering the call by deploying RPA across a wide spectrum of business processes, including accounts payable/receivable and other finance functions, human resources, customer care, procurement, compliance and security. The major drivers are as old-school as they come: direct savings from the elimination of human labor and indirect savings from reduced errors, management and other overhead expense. In the past 18 months, our lawyers have closed several transactions with an RPA component touted to do all of those things.

Legal Considerations

RPA offers a tremendous opportunity for retailers to reduce cost and speed up processes. However, as with any new technology, the use of RPA is not without risk and presents unique legal challenges. When encountering deals including RPA, retailers need to consider:

Structure & Performance

• Pricing – How will the pricing structure drive performance? Traditional ITO and BPO outsourcing pricing structures often focus on Full Time Employee and other resource unit costs, whereas RPA pricing structures should focus primarily on outcomes. Does your model allow for sharing of gains in robot performance?
• Benchmarking – How will you ensure your contract price is competitive in the market? A typical benchmarking model is based on resource/transaction-based pricing. Long-term RPA deals require a benchmarking clause focused on identifying transactions with a similar delivery model, scope of services, service levels and payment/performance credit structure. Comparison on the old-school metrics of size and geography is less relevant.
• Performance – What will count as success? Are higher error rates tolerable if the price is right? Must error rates be reduced over time? Must human engagement be reduced over time?
• Maintenance – What obligation does the service provider have to test, develop, correct and improve RPA capabilities?
• Data protection and security – How and what data will be developed and shared?
• IP infringement – Are you protected if the service provider’s RPA solution infringes on a third-party’s IP rights?
• IP ownership – RPA solutions “learn” by digesting retailers’ data, which produces a smarter and more effective product. Who will own your company’s contributions and insights that are incorporated into the RPA solution? Those contributions have real value – how will you participate in it?
• Service provider acquisition or failure – What are the implications for you as a customer? Can you keep the robots? Will they function without the service provider?

In an area marked by rapid development and improvement, retailers should structure RPA deals to be short term and include low barriers to termination to allow themselves the flexibility to move with advances in technology. Retailers also need to pay particular attention to the inputs and outputs (i.e., data and IP) of the RFP solution. Lastly, retailers should consider creating a compensation schedule for significant contributions made to the development of the service provider’s RPA offering in the form of equity, royalties and/or discounts.

Realize, too, that RPA providers are still evolving their business models. In some cases, providers haven’t modified their structures for RPA, thinking of it as just another software tool that is opaque to the customer. Others are licensing the tools in parallel to their services offerings, but will contemplate free-standing licenses. At this early stage, the models have some fluidity and may require more thoughtful engagement by the customer.

Risk Allocation

There are also several important issues to consider regarding the allocation of risk, especially where higher-functioning, cognitive computing applications are involved. Retailers must ensure that they know what the robots are doing. Ask for specific representations about the function of the software and what it does with your data and react accordingly. Include disclaimers and limits of liability/exculpation with respect to your contributions to the service provider’s RPA system. All of the provisions of traditional services agreements should be reconsidered in light of the shift from humans to software (e.g., hiring rights become irrelevant, but broad software licenses and escrows might be more important).

Retailers also need to create indemnity structures that adequately address the complex set of risks involved with this new technology. When analyzing their RPA indemnity structure, retailers should ask themselves the following questions:

• IP – Typical carve-outs for customer specifications may not be appropriate; are we managing the exposure?
• Third-party claims – are we protected against comparative fault relating to reuse of our contributions?
• Third-party claims – Have we addressed claims for breach of negative covenants relating to what the software must not do?

Conclusion 

There’s no doubt that the robots are coming. According to the Everest Group, 28 percent of companies have deployed RPA, 40 percent think RPA is the most enabling technology today and 50 percent of global in-house IT service centers are planning or pursuing RPA pilots with service providers. Transparency Market Research predicts that the global RPA market will grow to nearly $5 billion by 2020.